Green Mountain Coffee Roasters Q3 Earnings Call Transcript

123jump.com Staff
08 Aug, 2011
New York City

The specialty coffee and coffeemakers company stated net quarterly sales soared 127% to $717.2 million. Net income in the quarter surged 206% to $56.3 million driven by strong revenue growth. Earnings per diluted share rose to 37 cents versus 13 cents per share a year-ago quarter.

Green Mountain Coffee Roasters Inc. ((GMCR))
Q3 2011 Earnings Call Transcript
July 27, 2011 5 p.m. ET

Executives

Suzanne DuLong – Senior Vice President, Investor Relations & Corporate Communications
Lawrence J. Blanford – Chief Executive Officer and President
Frances G. Rathke – Vice President and Chief Financial Officer
John Whoriskey – Vice President and General Manager, Keurig’s At Home Division
T.J. Whalen – Vice President, Marketing

Analysts

Akshay Jagdale – KeyBanc Capital Markets
Scott Van Winkle – Canaccord Genuity
Greg McKinley – Dougherty & Company
Mitchell Pinheiro – Janney Montgomery Scott
William Chappell – SunTrust Robinson Humphrey
Bryan Spillane – Bank of America/Merrill Lynch
Mark Astrachan – Stifel Nicolaus
Jon Andersen – William Blair & Company
Tony Brenner – ROTH Capital Partners
Alton Stump – Longbow Research

Presentation

Operator

Good afternoon and welcome to the Green Mountain Coffee Roasters, Incorporated Fiscal 2011 Third Quarter Conference Call. Today’s calling is being recorded. At this time, I would like to turn the call over to the company’s Vice President of Investor Relations and Corporate Communications, Suzanne DuLong. Suzanne, please go ahead.

Suzanne DuLong

Thank you, Patrick. Welcome, everyone. Today’s press release is available on our website at www.greenmountaincoffee.com. Consistent with past quarters, our prepared remarks have been furnished in a Form 8-K filed with the SEC and will not be read on today’s call.

On today’s call, our President and CEO, Larry Blanford, will provide some introductory remarks, reviewing the quarter’s results and our business. Following Larry’s remarks, we will open the calls to questions from the sell-side analysts. Several members of our management team are with us for today’s Q&A session, including Fran Rathke, our CFO; T.J. Whalen, our Vice President of Marketing for the Specialty Coffee Business Unit; and John Whoriskey, our General Manager of the Keurig At Home Division. Due to scheduling conflicts, Scott McCreary and Michelle Stacy cannot be with us today, but the rest of the team will address your questions.

Due to time constraints and to ensure we have the opportunity it address everyone’s question during the call, we ask that you limit yourself to one question. If time permits, we will revisit the queue for follow-up questions.

Finally, I will remind everyone that certain statements will be made today which are forward-looking within the means of the securities law. Owing to the uncertainties of forward-looking statements, our actual result may differ materially from anything projected in these forward-looking statements. We can give in assurance as their accuracy and we assume no obligation to update them. For further information on risks and uncertainties please read the company’s SEC filings and the paragraph in today’s press release that begins with the word certain statements.

And now, I’ll turn the call over to our President and CEO, Larry Blanford.

Lawrence J. Blanford

Thanks, Susan and hello, everyone. We appreciate your joining us today to discuss our fiscal third quarter results. I am thrilled to report we delivered net sales of $717.2 million, a growth rate of 127% over the same period in fiscal 2010.

Our non-GAAP earnings per diluted share increased 140% to $0.49 in the third quarter of fiscal 2011, up from $0.21 in the third quarter of fiscal 2010 and exceeded our guidance range largely as a result of stronger than anticipated portion pack driven revenue growth in the quarter.

In addition to continued strong consumer adoption of the Keurig Single-Cup Brewing system, we believe our third quarter results benefited from our heightened spring advertising and brand support programs. These programs were designed to raise awareness of the Keurig Single-Cup Brewing system and our Brew Over Ice perfect iced teas and iced coffees as we headed into the summer month.

Our nationwide television advertising was supported by in-store demonstrations and other merchandising, all emphasizing Brew Over Ice as another opportunity to use the Keurig Single-Cup Brewer. We had a very positive retailer reaction to our efforts and we believe the combination of advertising and retailer merchandising helped to derive both portion pack and brewer sales in the quarter. In fact, while still a nascent concept in effort, during our spring promotional period Brew Over Ice portion packs represented approximately 5% to 6% of total portion packs sold through our specialty and mass channels during the promotional period.

While difficult to quantify, we also believe we saw a bit of catch-up effect from Q1 and Q2 in our fiscal Q3. As we have continued to add portion pack production capacity in Q3, we were able to fulfill customer demand that had pent-up in the system over the prior two quarters.

Approximately 82% of consolidated net sales in the third quarter were from the Keurig Single-Cup Brewing system and its recurring portion pack revenue, including Keurig related accessory sales. This percentage is down from the roughly 88% in the year-ago period as a result of the addition of the Van Houtte-related revenue to consolidated sales.

During the quarter, we took several steps to strengthen our balance sheet and ensure access to the capital we believe is necessary to grow our business. I am very pleased with our successful equity offering and our amended credit facility.

Turning to our business value drivers, which are detailed in our published prepared remarks, there are three items I want to address directly in my comments today. First, on increasing portion pack consumption. Beyond our early success with Brew Over Ice, our beverage development group is hard at work on new beverages for new occasions.

We are very excited about the new products we have in the pipeline, including beverages that could provide functional and/or wellness benefits. We believe there’s a meaningful opportunity for beverages beyond hot coffee and tea and we’re looking forward to bringing new beverages to Keurig consumers, who have demonstrated a strong willingness and desire to try them.

Second, on scaling to meet demand. It’s no question that our growth in recent years has been extraordinary. As we planned for fiscal 2012 and beyond, it became clear that anticipated growth of the Keurig Single-Cup Brewing system would continue to drive significant increases to current portion pack production capacity.

An important driver behind our anticipated 2012 CapEx spend is the fact that our internal expectations about our opportunity for brewer sales have increased for a number of reasons, including the growth we’ve experienced thus far this year, the addition of powerful brands like Folgers, Dunkin’ Donuts and Starbucks to the Keurig Single-Cup Brewing system and the fact that interest in the system is now spanning broader demographics than originally envisioned.

As result of these increased brewer adoption expectations, we believe we will need to continue adding portion pack production capacity at a rapid clip. We expect the majority of our $650 million to $720 million in planned 2012 capital expenditures will go to scaling our portion pack production capacity, enabling us to meet forecasted demand for 2012 and readying us to meet anticipated 2013 demand.

We currently expect to fund our anticipated 2012 CapEx through a combination of cash generated from operations, existing cash on hand and our existing lines of credit. We expect our current production facilities footprint will accommodate some of the additional required capacity but we expect we will both expand our existing facilities and add two manufacturing sites in the U.S. in fiscal 2012. We noted last quarter that we had begun the site selection process and we are near the final stages for the first of these sites.

During fiscal 2012, we expect to incur as much as $30 million in startup expenses related to these new plants. In addition, we also expect to incur 25 million in staffing and plant operational expense across the system related to deploying readiness capacity in 2012.

In the past, we’ve aimed to have enough capacity to meet our forecasted demand plus an additional 7% to 10%. In the last year we have increased our capital expenditures as we moved through the year and repeatedly hit new records of production as we continue to install capacity. However, we continued to also experience spot outages of portion packs with our customers.

We believe scaling our production to accommodate a measure of flexibility above our current demand forecast is a necessary investment for the business and will enhance customer service as well as potentially capture any unplanned upside demand to the extent it materializes.

And thirdly on geographic expansion, I am very pleased to report that the integration of Van Houtte continues to move forward as planned. Our Canadian business unit created following the acquisition of Van Houtte on December 17, 2010, contributed $11.7 million to the consolidated net sales in the quarter, representing approximately 16% of total sales.

While this business units currently consists of the former Van Houtte business, beginning with the start of our fiscal year 2012 we will roll our Timothy’s operations based in Toronto and currently part of our Specialty Coffee Business Unit into our Canadian business unit results. Beyond the integration of Van Houtte in pursuit of what we believe is incremental opportunity in Canada, we are evaluating our opportunity outside of North America.

We believe we have opportunities in several geographic regions, but we are not yet ready to speak to specific plans at this time. As we said previously, our first priority is and will remain capitalizing fully on the opportunity we see in North America.

Touching on enabling initiatives, which are those efforts designed to facilitate growth in the years to come, some of our key initiatives revolve around our alignment with strong coffee and beverage brands in order to support a wide range of consumer choice and taste profiles in the Keurig Single-Cup Brewing system. I am pleased to report that our newest relationships with Dunkin’ Donuts, Starbucks and ConAgra continue to move forward smoothly.

We began commercial Dunkin’ Donuts branded in portion packs during the third quarter. Production is going well and Dunkin’ will have the products in their U.S. locations sometime in August. Early consumer feedback from their locations where they have been testing the in-store merchandising of the products has been very positive.

Our work with Starbucks also continues to go well in anticipation of a fall 2011 availability of Starbucks branded portion packs in grocery, mass club and retail channels. Finally, our work with ConAgra to introduce the Swiss Miss brand to the Keurig Brewing system continues to move forward, with a goal of reaching broad availability on grocery shelves by cooler weather and a peak hot cocoa consumption time.

In addition to expanding consumer choice in the system, we believe these relationships fuel new excitement for current Keurig owners and users, raise system awareness and of course, attract new consumers to the system. The rolling out of these brands into our system has been planned and executed in a thoughtful and deliberate manner and is factored into our 2012 guidance.

As we said previously, while we do not expect to disclose the financial terms associated with these relationships, we can say that the high level economics are such that going forward we expect our business model will be fairly indifferent to sales of GMCR branded versus partner branded portion packs. That said, we will of course continue to work to drive sales of our flagship brands and new beverage products within the system.

Finally, continued innovation is a key contributor to our enabling initiatives. As we discussed previously, in addition to our work with Lavazza to develop a new espresso based system, we also have a new Keurig filtered coffee brewing platform in development.

Our new Keurig platform is in consumer test currently and we do expect that we will be producing portion packs for the platform in fiscal 2012. As a result, we expect approximately 20% of our anticipated fiscal 2012 CapEx spend will go toward portion pack capacity for this new platform.

In closing, with Keurig Brewing changing the way North America brews and enjoys coffee at home and in the work place, we are excited and humbled by the opportunity we see ahead for our company. Isn’t it exciting that a company celebrating it’s 30th year anniversary has the chance to guide for revenue growth of 60% to 65% and implied earnings growth of 53% to 63% in the coming year.

Supporting and enabling net growth remains our most significant challenge and the focus of every one of GMCR’s employees. I want to take this opportunity to thank our employees and our extended supply chain partners for making our success possible.

Operator, we will now take questions from the sell-side analyst. As Susan stated in the introduction, we ask that you limit yourself to one question and if time permits, we will revisit the queue for follow-up questions. Operator, will you open the question queue?

Question-and Answer Session

Operator

Yes, sir. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do it by pressing the star key followed by the digit one on your touchtone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We’ll proceed in the order that you signal and we’ll take as many questions as time permits. Once again, please press star one on your touchtone telephone to ask a question. We’ll take our first question from Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale – KeyBanc Capital Markets

Thank you. Congratulations on another good quarter. Larry…

Lawrence J. Blanford

Thank you. Appreciate it.

Akshay Jagdale – KeyBanc Capital Markets

Yeah. Just wanted to ask you about the future growth opportunities beyond coffee, I mean, in terms of your guidance for fiscal 2012, can you help us understand how much of it is related to, in your opinion, like non-coffee related opportunities?

Lawrence J. Blanford

Yeah, Akshay, that’s a good question. I think we’re not providing at this juncture a break out of our estimate. I think what we in the ‘12 guidance we certainly factored in our thoughts about expanding the Cafe Escapes product line, Hot Apple Cider, our new BaristaPrima, although that’s coffee and of course, continuing to drive our Brewed Over Ice teas and coffee products next spring.

So I think it’s still a bit early to put a number on all of that, but certainly new beverage is a key driver. First driver -- value driver for our business is certainly brewer adoption, but very important driver behind that are new beverages and we’re very excited about the opportunity going forward.

Akshay Jagdale – KeyBanc Capital Markets

Perfect. I’ll get back in line. Thanks a lot.

Lawrence J. Blanford

Thank you.

Operator

We’ll take our next question from Scott Van Winkle with Canaccord Adams.

Scott Van Winkle – Canaccord Genuity

Hi. Congratulations, everyone.

Lawrence J. Blanford

Thanks.

Scott Van Winkle – Canaccord Genuity

My one question is in 27 parts. I just -- I would love to dig further into the accelerated revenue growth of the portion packs this quarter versus the last two and I understand the pent-up demand being alleviated with capacity (inaudible) price added -- adding to -- or price adding 13% to year-over-year revenue from the company. Can we just exclude brewer revenue and figure out what that 13% is and apply it all to K-Cups? Is a portion of that higher prices or a portion of that mix of K-Cups to BaristaPrima? I’m just trying -- to if you could expand a little bit on how we went from 60% growth (inaudible) seemingly overnight?

Lawrence J. Blanford

Fran, do you want to address that.

Frances G. Rathke

First is to address overall the price increase. As we said in our press release, (inaudible) sales of portion packs were up 136% and as you noted, Scott, a piece of that price -- a piece of that also is the fact that we now own Van Houtte as well as, for this quarter, we had the full quarter of Diedrich where last year we only had them for half the quarter. So sort of all boiling that all down, I think the price increase -- I just want to point out, as we said in the press release, that is estimated to have helped increase our top line by about 13% in total.

So if you look at those dollars, most of the price increase effect was really from that earlier price increase that was on portion packs only, whereas this second price increase that took effect late in June was on all coffee products. So I think the majority of that 13% I would ascribe to the K-Cup sales, so that end up being closer to almost 20% for the quarter just for the portion pack piece.

So coming down to your point about Q3, I think we were surprised to the upside on the strength of the portion pack sales. Some piece of it is related to, as we said, really products we didn’t have to ship out for customer orders in Q2 that we got caught up in Q3. Also, a little bit of this that’s hard to measure is the second price increase went into effect in June -- toward the middle of June, so I think we had some customers who tended to order a little bit stronger on the heels of that, but I don’t think that’s a big piece of that. I do think a lot of it is we added a lot of new Keurig households to our install base coming off of a strong holiday and fiscal -- or our second quarter in fiscal ‘11.

Lawrence J. Blanford

Yes. Scott, I would just add, too, as a we referenced in our remarks -- in my earlier remarks, we -- really this is the first time we launched a national television advertising in the spring and we found I think that was very positive and it exceeded our expectations as well in terms of creating awareness for the Keurig Brewing system, as we moved into Mother’s Day, Father’s Day, (inaudible) Day, very strong support from our participating retailers and while we are focused on Brewed Over Ice, I think we drove both brewer sales and additional portion pack sales in general as a result of the strong promotional activity in our own advertising in the spring.

So much so that I think we will incorporate a spring program going forward. So have the power of the holiday drive period, October, November, December and we’ll come back then with a spring drive period behind beverages that are particularly suited for spring and summer, but certainly again creating awareness for the system. So we just had a lot of things working on our behalf in the quarter.

Scott Van Winkle – Canaccord Genuity

Yeah, I apologize. When I said 60% to 70%, that was my own estimates of unit growth. Would -- could you give us maybe just to follow-up -- sorry, I’ve got another question, the acceleration, could you balance it between units and dollars, dollars from mix and from price increase? You’re not giving units, but were they 50/50? Was it more mix and new stuff or -- just trying to boil it down since there’s lots of things happening with acquisitions and pricing and such and such?

Frances G. Rathke

Well, I -- this is Fran, Scott. So the -- overall, in terms of trying to get to some kind of unit estimate, I think once again the 136% increase in portion pack dollars, if we sort of subtract off of that price, I would say more in 20% or so range. And then subtract -- Van Houtte has historically and I think continues to be in the 8% to 10% or so of the total consumption out there in terms of the portion packs, that’s something new we have that we didn’t have last year in our numbers. So if you track that down and then once again I said we had about half of Diedrich.

So we’re definitely have had an acceleration in units growth in Q3. Our guidance as we gave Q4 -- once again we don’t give unit guidance, but I think we don’t -- we think this quarter was very, very strong as we just kind of tried to outline some of the reasons. I think next quarter we expect strong growth, but not as strong as what we saw this quarter. So, in terms of boiling that down, we probably definitely close to the high 90s, 100% range growth-wise.

Scott Van Winkle – Canaccord Genuity

Thank you very much. Look forwards to seeing you guys at our conference a couple weeks.

Lawrence J. Blanford

Okay. Scott. Part one, part two and part three questions. Okay. Who we got? Next?

Operator

We’ll take our next question from Greg McKinley with Dougherty & Company.

Greg McKinley – Dougherty & Company

Yeah. Thank you. Outstanding results here. I guess I wanted to hear your thoughts on sourcing capabilities, with the company growing at the rate it has. How do you feel about your distribution partners teeing you up here for the holiday season? Also, I guess supply of brewers as you think about retail demand and then with the K-Cup momentum as it is, can you comment if there’s been any competitive fall out that you think may have benefited for you? I know I’m not seeing Tassimo on shelves at grocery or mass-market like I used to. Is that playing a role?

Lawrence J. Blanford

I would -- Greg, this is Larry. I would just say broadly, certainly as mentioned, we have a tremendous efforts going on throughout the company and I’m very proud of our folks working with our partners throughout the supply chain. That can be on procuring coffee, developing capability for Cafe Escapes, working with Simatelex’s on brewer production and their suppliers to ensure that they have adequate parts and components and certainly working with our own plants and our distribution partners to get brewers and coffee to our customers.

And very importantly, working with our customers where this business for them -- for a number of them is getting so significant that I know a lot of the effort of our sales team is actually working with our customers on their logistics in terms of their ability to receive, to get the product out on the floor, get it merchandised, because as we move into the holiday season this product will be moving very quickly through a number of their stores. So it’s throughout the supply chain.

Having said all that, I feel we’re in pretty good shape. We are -- we’ve worked very carefully with each of our customers to agree upon a target number of products that we’re going to -- we’re committed to supplying them. I think we’re in position to do that. I don’t believe we have in Q1 and Q2 much upside beyond those committed numbers, but we are dedicated to supporting our customers to the extent that we have worked with them to come to agreement on the demand forecast.

And then we’ll be adding capacity through this -- the balance of this year and into next year and we should be in -- as we said -- as I said in my notes, we’re trying to get ourselves to a position ultimately where we have some excess capacity to handle customer needs and potentially upside.

John Whoriskey

Greg, this is John Whoriskey. I would just add to Larry’s comments by saying our -- one of our number one objectives is working with all of our retail partners going into the fall holiday season and beyond is space planning to meet the growing needs of our franchise within the retailer stores. And our position there certainly continues to grow and with space going freed up from other people in the category, that certainly helps that process for us, but we have to work very hard with our partners to make sure they are prepared for what we all expect will happen in the upcoming months into the holiday season.

Greg McKinley – Dougherty & Company

Very good. Thank you.

Lawrence J. Blanford

Thank you.

Frances G. Rathke

Thanks, Greg.

Operator

We’ll take our next question from Mitch Pinheiro with Janney Capital Markets.

Mitchell Pinheiro – Janney Montgomery Scott

Hi. Good afternoon.

Frances G. Rathke

Hi, Mitch.

Lawrence J. Blanford

Hey, Mitch.

Mitchell Pinheiro – Janney Montgomery Scott

So my question is around your fiscal ‘12 guidance. What type of coffee price assumption do you have for fiscal ‘12 or what type of increase or decrease year-over-year do you expect?

Frances G. Rathke

Mitch, this is Fran. In terms of our estimates, we’re assuming that there would be no substantial change in the pricing; that we now have taken this -- the second price increase that went into effect in late June, that-- those prices -- average selling prices, et cetera, will not really change in fiscal ‘12.

Lawrence J. Blanford

Yes. Having said -- if I could just add to Fran, Mitch, as I think we’ve talked before, that is what’s in our current estimates. However, what we’ve said is that, should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year, but our objective long-term is attempting to maintain our gross margin as we would see input costs come along.

Mitchell Pinheiro – Janney Montgomery Scott

Okay. So that -- are you hedged in your typical fashion in terms of…

Lawrence J. Blanford

Yes. As we’ve said, we typically hedge six to nine months out in front. We are -- hedge meaning that we’ve contracted for coffee. We are pretty well fixed, I think, through Q2 of the next fiscal year and we’re beginning to buy coffees in -- for Q3. And obviously we have seen coffee prices back off a little bit from the highs. I think we got actually -- what we saw in the market was something that got -- the C price got a little over $3 and we are in the I think $2.50 range right now and we’re taking advantage of that as we’re starting to buy coffee for the third quarter of next fiscal.

Mitchell Pinheiro – Janney Montgomery Scott

Okay. And then just following up on the fiscal ‘12 guidance, the $30 million in startup expenses and the $25 million in staffing and other operating expenses, they are -- is that SG&A or is any of that in CapEx? And then is this -- these are in your $2.55 to $2.65 guidance?

Frances G. Rathke

Mitch, this is Fran. The $30 million in startup expenses and the $25 million in staffing and operating expenses is essentially plant related and that is in cost of goods sold. And that is the expense, essentially getting everything up and running and incurring things before we really are turned on fully at the plant. And the CapEx -- it is not CapEx. That’s separate.

Mitchell Pinheiro – Janney Montgomery Scott

Okay. And they -- these a $55 million of additional costs are factored -- its included in your current guidance?

Frances G. Rathke

That’s correct.

Mitchell Pinheiro – Janney Montgomery Scott

And then just a last question related to guidance. Does the development of next gen, your new brewer and also whether -- you haven’t really announced or maybe you have -- about Lavazza partnership, that espresso type of brewer. Are they also factored into your numbers and are they a drag at all on the size of these expenses here that we just talked about? Are they a drag- on fiscal ‘12?

Frances G. Rathke

Mitch, this is Fran. Yes, we do have anticipated sales and rollout of our new platform, as well as on potential -- I would say not material -- costs associated with Lavazza, but it’s really more about the next gen platform. So I think on -- it is not something that is, I would say, an incremental, it’s more of a drag on earnings, not an addition to earnings, as we start up and roll out that product line.

John Whoriskey

So. Okay. So the new brewer -- you’re not really -- it’s neutral to negative to earnings in ‘12 or do you think at all it has any potential to be incremental positively?

Frances G. Rathke

I think our sense is, it’s a new platform, we have new lines in our CapEx. Approximately 20% or so of that number that we gave as an estimate is related to new packaging lines associated with the new platform portion pack. And I think as we get started, we anticipate and these are in our estimates, that would not be as cost effective right out of the gate. So I think it’s much more a high probability this would be a drag on earnings rather than a help to earnings.

Mitchell Pinheiro – Janney Montgomery Scott

Okay. All right. That’s very helpful. Thank you very much.

Frances G. Rathke

You’re welcome.

Operator

We will take our question from Bill Chappell with SunTrust Robinson Humphrey.

William Chappell – SunTrust Robinson Humphrey

Good afternoon.

Lawrence J. Blanford

Hi, Bill.

William Chappell – SunTrust Robinson Humphrey

Larry, obviously congratulations on the quarter and the guidance, but would you mind just kind of talking on kind of how you see knock off private label kind of affecting the market over the next couple years? You don’t need to talk about lawsuits or anything per se, but clearly the patents roll off in a year and there might be some kind of me-too type products out. How do you see that evolving and then judge as a one-off follow-up, Fran, can you talk about what the tax rate will be next quarter and next year? Thanks so much.

Lawrence J. Blanford

Okay. Bill. I will deal with your question at a high level. First of all, with respect to our patents and intellectual property, we have a broad portfolio of patents on portion packs, on brewers, on the system of the -- of both portion packs and brewers. And certainly to the extent that any other product might infringe on our intellectual property, we take that very seriously and we would, in fact, rigorously defend our intellectual property.

Having said that, we are first and for most building our business on meeting and exceeding consumer expectations and that’s with the brewing system and with the beverages and brands of beverages that are within the system. I think the categories that we’re participating in brands, beverage brands, compete every day with private label products. Overwhelmingly consumers in traditional categories choose brands and I think that’s likely to be the case in our system as well.

So those are a couple of factors I think related to the consumer. Then beyond that, as we think about our business, we have tremendous credibility and momentum with our retail customers and of course, as we have just announced, we already have scale and we’re investing a lot of money in additional plant and equipment. And we are in an excellent position to serve, think, the growing demand that we are seeing in the marketplace. So I think if you sit back a and look at all those factors, we’re -- I think we’re in very good shape. Your second question on tax?

Frances G. Rathke

Second question on tax. Bill, in our prepared remarks, by the way, we note that for fiscal ‘11 overall we think we’re going comes to come in around 37.6% on the tax rate. For ‘12, I guess approximately 38%. The 37.6% has known discrete benefit items, so I would use 38%.

William Chappell – SunTrust Robinson Humphrey

Great. I’ll get back in the queue, but thanks for the color.

Lawrence J. Blanford

All right, Bill.

Operator

We’ll take our next question from Bryan Spillane with Bank of America.

Bryan Spillane – Bank of America/Merrill Lynch

Hey. Good afternoon.

Lawrence J. Blanford

Hi, Bryan.

Bryan Spillane – Bank of America/Merrill Lynch

I’m trying too figure out which one question to ask, but I think just relative to the guidance, I guess to follow up the line of questioning that Mitch went through. The capital spending, if -- right now the fixed assets on your balance sheet are about $499 million and so you’re going to -- the plan is to spend somewhere in the neighborhood of $700 million next year. So that’s a pretty significant increase in your asset base.

I understand some of it is to put in production for the new -- the next gen K-Cups -- or portion packs, but is it -- I mean basically by looking at the spending levels, you would be roughly doubling your capacity on K-Cups. Is that the right way to think about it?

Lawrence J. Blanford

Yeah, Bryan. I think what I would say is over the last four years, to put this in perspective, we have worked -- this is Larry -- very diligently on putting in place the, let’s say, pillars are growth for our business. That would include acquisitions, partnerships, both with other brewer manufacturers and, of course, with branded beverage manufacturers and marketers, as well as investing aggressively for what was a small company becoming larger, in R&D and new beverages and in new brewers an portion packs.

And I think what we’re saying is, as we sit here and look forward -- and certainly we have provided our first estimates for ‘12, but the -- we are seeing, as indicated on my comments, that for a number of reasons brewer sales are going to be larger than we had ourselves anticipated. We’ve learned recently as an example that the biggest driver quantitatively of brewer sales are consumers who already own brewers.

So brewers beget brewers. So as our install base grows, word-of-mouth spreads and that drives more brewers and of course we’ve also seen an expansion in the demographics. From where we initially started and the demographics that we targeted originally, we have seen the demographic now that is interested and excited about the brewing system expand.

So for a number -- and then of course we’ve at these new partners, which bring a lot of excitement to the system. So for all those reasons what we’re trying to do now is make sure we are in a position to capitalize on all of those pillars of growth we’ve put in place here these last several years. And the capital that we’re talking about here certainly supports ‘12, but as I mentioned, really is to support what we think is continued growth in fiscal ‘13.

Bryan Spillane – Bank of America/Merrill Lynch

Is it fair to say, just to characterize, up until now, when you were -- when it was -- when you were a smaller company, you could kind of plan your CapEx a year forward and the numbers are too big, the constituents are too many? You just can’t do that any more. Is that -- you can’t go through having customers on allocation or you got to be able to meet the demand. And so you’re demand forecast is bigger and you need to really start scaling up for that. I mean that’s essentially the point you’re at now.

Lawrence J. Blanford

I think there’s some truth in what you’re suggesting. Obviously, as we are he getting bigger, retail customers are holding us accountable. We’re not necessarily the little company from Vermont any longer. And we certainly, as the numbers get bigger, to ensure that we do have adequate capacity and whether again it’s in the production of brewers or portion packs and working with our distribution capability, et cetera, et cetera, that we talked about before, we really do have to go further out in our thinking and our planning. So I think your observation is a good one.

Bryan Spillane – Bank of America/Merrill Lynch

And then just one last follow-up. Just in terms of the capacity additions given that you’re going to have -- you’ve got some pretty sizeable partners that you’re working with. Is there a plan to actually put packaging capacity in or very near the roasting facilities for Dunkin’ and Starbucks and Folgers and much of what you call Swiss Miss, it’s not roasting (inaudible)

Lawrence J. Blanford

Yes. In all of our -- all of those agreements we will be doing the packaging for all of the product that goes into portion packs for those brands. And initially we’ll be utilizing our existing facilities. We do have I very good job, I think, of using linear programming models to try to optimize our overall manufacturing framework for North America, which takes into account all forms of demand, where our distribution centers should be, how many plants we should then have supporting those distribution centers.

And so while I would not say necessarily that we would set a packaging plant down necessarily adjacent to one of our branded partners, I think in general, as we look at the North American market and we continue to build out our North American manufacturing infrastructure, we certainly want to make sure that we take advantage of transportation efficiencies between their roasting plants and our packaging facilities and our packages facilities and our distribution centers, across the North American infrastructure. Most of these folks do have multiple sites themselves roasting coffee and we certainly would take advantage of that.

Bryan Spillane – Bank of America/Merrill Lynch

All right. Thank you, Larry.

Lawrence J. Blanford

You’re most welcome.

Operator

We’ll take our next question from Mark Astrachan, Stifel Nicolaus.

Mark Astrachan – Stifel Nicolaus

Thanks and good afternoon, everybody.

Lawrence J. Blanford

Hey, Mark.

Mark Astrachan – Stifel Nicolaus

One follow-up and one new question. I guess given the moving part, can you give the benefit from pricing and acquisitions to non-GAAP EPS in fiscal 3Q and/or for fiscal 2011, or at least help me directionally understand the benefit? And then on fiscal 2012 guidance, can you discuss the puts and takes of sales growth and margins just given recent brewer growth and that my math you’re not anticipating a lot of margin expansion, at least net margin expansion?

Frances G. Rathke

Sure. Mark, this is Fran. In terms of your first question, in terms of the impact on -- from pricing, I think we mentioned last quarter in our press release we had information about that first price increase that started to take effect in the first quarter and then also on February 1 for a number our additional channels for K-Cup portion packs. And that ended up I think around 10% or so price increase.

The second one, for Q3 on portion packs contributed about 20% of the increase of 136%. So I don’t know -- and then in terms of acquisitions, I think we mentioned that Van Houtte this quarter was the primary increase. I think sales were approximately $111 million to the top line as an addition and as you know, Van Houtte’s business is not as heavy K-Cup portion packs as Diedrich’s or Timothy’s. So I think approximately 9% to 10% of our units historically have been Van Houtte and that still remains about the same number for this quarter.

Mark Astrachan – Stifel Nicolaus

Well, I guess I’m trying to get a little bit deeper beyond the top line, because it’s just really difficult to model the business given the information that you provide. So I’m trying to understand a bit more on what the impact is from below the top line on some of these deals, like acquisitions or from pricing. Like how closely does increasing coffee costs mirror the pricing that you’re taking and then what doses Van Houtte or Diedrich contribute beyond the top line?

Frances G. Rathke

I think in terms of price -- or for this quarter the price increase we took into effect this quarter essentially covered the coffee increase costs. So I think the main reason for the gross margin increase this year over the prior year was due to the mix -- the sales mix shift away from brewers to much heavier weighting towards portion packs and bag coffee.

In terms of contribution to operating income from Van Houtte, I know we’ll be filing our Q next week also, so I guess see some of the data, but overall as we noted on a segment basis, Van Houtte, as I said, was approximately $111 million in sales. And in terms of bottom line -- hold on, I’m pulling out the Q draft -- the segment income before income taxes for this quarter, the Canadian business units contributed about 13.4.

Mark Astrachan – Stifel Nicolaus

And that’s non-GAAP?

Frances G. Rathke

To operate -- to net income before tax.

Mark Astrachan – Stifel Nicolaus

That’s GAAP, non-GAAP?

Frances G. Rathke

That is a non -- I mean -- excuse me -- a GAAP number because, that includes the increments -- that includes the amortization for the identifiable intangibles of Van Houtte.

Mark Astrachan – Stifel Nicolaus

Great. And then for fiscal 2012 guidance, any color there please?

Frances G. Rathke

I don’t -- we don’t break it out specifically, but I think overall we’re feeling comfortable that Van Houtte, in terms of as an acquisition, will be slightly accretive or accretive to earnings next year.

Mark Astrachan – Stifel Nicolaus

But what about in terms of the puts and takes on sales growths and then the margin expectations?

Frances G. Rathke

Overall in terms of next year – we don’t give out the specific margin guidance, but I think in general our top line guidance for fiscal 2012, 60% to 65% top line growth, with EPS growth pretty similar, maybe slightly lower due to the investment spend on the manufacturing capacity.

Mark Astrachan – Stifel Nicolaus

Okay. Thank you.

Frances G. Rathke

Thanks, Mark.

Lawrence J. Blanford

You’re welcome, Mark.

Operator

We will take our next question from Jon Andersen with William Blair & Company.

Jon Andersen – William Blair & Company

Good afternoon and congratulations.

Frances G. Rathke

Thanks, Jon.

Lawrence J. Blanford

Thanks, Jon. Good afternoon to you, too.

Jon Andersen – William Blair & Company

Quick two part question. I know you’ve recently indicated that I think your best estimate would suggest that you’ve got about 7 million to 9 million brewers placed in U.S. consumers homes, which would put the penetration rate I think in the high single-digit range. First question is, is there any update to that number at present and more importantly, as you kind of have indicated that awareness and interest in the system is growing faster and I guess more broadly from a demographic perspective than you had imagined, how are you thinking about the household penetration rate and the opportunity there over the next few years?

Lawrence J. Blanford

Yes, Jon. Good question. I would say that we had been talking 7%, 9%. We just base this brewers that we’ve sold in the last quarter and given there’s 90 million households that have coffee makers or brewers in the United States, we probably need to raise that about a percentage point, so it’s probably 8% to 10% at this juncture in terms of the installed base.

On the forward potential for household and/or office adoption, we have refrained from ever providing our estimates. We certainly have our own thinking and estimates about what the ultimate penetration rates may be, but we have refrained from providing those. What, again, I would point to is though kind of the best -- or at least one way of thinking about it is to continue to look at MPD data where, if you look now at the last four quarters, on a units share basis, we’re well in the mid-teens of all coffee makers and brewers being sold. So -- which is certainly -- and that’s still growing.

And so I think if you -- certainly that share -- unit share, which is still growing, is higher than our installed base, which gives us comfort that we still have a significant upside. If that’s helpful.

Jon Andersen – William Blair & Company

It is. Just a quick follow-up on that. I mean, have you done any independent or separate maybe purchase intent studies in the consumer marketplace that would provide additional insight to when a consumer goes back to purchase or replace their existing brewer, how many may intend to migrate do a single serve technology?

John Whoriskey

Yes, Bryan [ph], this is John Whoriskey. I will just speak to two parts of that, is that we have done extensive market research and consumer work on segmentation studies, potential penetration of purchase intent, future purchase intent for the product. So inherent in our guidance going forward, that’s incorporated, but we’re not going to release the details of our internals around that. But we would say we feel very comfortable about where we’re projecting our future business growth to be.

I think to Larry’s points about unit share, unit share continues to grow. And last Christmas season fourth quarter, we were 25% of coffee maker -- unit coffee maker sales in the U.S. So -- and we’re continuing to grow, as you see on a quarterly basis, at roughly 50% or so today. So I think that’s fairly good guidance for you to be thinking about what the future could be and that would be probably enough said on that subject.

Lawrence J. Blanford

Yes. Our growth in the quarter over the quarter] was about 50% or so.

John Whoriskey

Yes, 54% this latest quarter.

Lawrence J. Blanford

54% unit share growth in the quarter just completed versus …

John Whoriskey

And that’s only our share of the sales as well.

Lawrence J. Blanford

That does not include our licensed partners sales. Great point. It does not include our partners.

Jon Andersen – William Blair & Company

Thanks a lot. That’s helpful and congratulations again.

Lawrence J. Blanford

Jon, thank you. Appreciate it.

Operator

We’ll take our next question from Tony Brenner with ROTH Capital Partners.

Tony Brenner – ROTH Capital Partners

Thank you and good afternoon.

Lawrence J. Blanford

Hey Tony.

Tony Brenner – ROTH Capital Partners

I’m curious about the price increase -- or increases that you took and the fact that immediately thereafter coffee prices have rolled over by 15% to 20%. An I’m wondering to what extent retailers and particularly in the grocery channel, are requesting or demanding deal-backs for some portion of that?

T.J. Whalen

Tony, this is T.J. Dollars for your question. As Larry mentioned, we have seen the C as high as north of $3, but even with its relatively recent retreat to around $2.50, which frankly was where it was when we started thinking about pricing action, it’s I think somewhere on the order of 50% to 70% higher year-over-year. So it’s a very significantly elevated coffee market at the basic C level. And then take into account the differentials that we continue to pay to secure the highest quality coffees around the world, our actual costs are very significantly above where they were when we took our first pricing action.

And so, our goal, I think as Larry said, is to recover that cost in pricing and I think we’ve been successful with that strategy in the marketplace. And then from a future buying standpoint continue to fix in the six to nine month range, which gives us time to evaluate how things are going to shape up in the future.

Tony Brenner – ROTH Capital Partners

Okay. Thank you.

Frances G. Rathke

Thanks, Tony.

Lawrence J. Blanford

Thank you, Tony.

Operator

Next question from with Longbow Research.

Alton Stump – Longbow Research

Thank you. Good afternoon and great job with the quarter and the outlook.

Lawrence J. Blanford

Thanks, Alton.

Alton Stump – Longbow Research

I just have a quick question. If you gets back to the kick of acceleration, not just trying to beat a dead horse here, but with the capacity that came online, was there any channel fill benefit there? I know you mentioned, Fran, that you thought the growth would come down a bit in Q4 for K-Cups versus Q3. Is that what you’re pointing to? If so, any color you could provide as to how big that channel fill might have been if it was there?

Frances G. Rathke

Alton, this is Fran. In terms of -- there’s one -- in terms of channel fill, I think one thing that happened, as we said, is we had -- for us a significant increase in a spring advertising campaign. So I think a lot of our customers, as we planned for that, got very excited about that. So it wasn’t just portion packs, but also brewers. I think we got a lot of space, demos, advertising, I think a lot of awareness. So I think it wasn’t necessarily channel fill, but I think it was to support an advertising campaign and demos, there was strong sales to our customers for portion packs, especially Brew Over Ice.

Second, I think coming off of Q2, we definitely had shortages or outages of certain products. So I do we know had a backlog that we fulfilled in Q3 on -- so that was a piece of it. So I feel what we’ve been seeing and hearing from all of our accounts is that during Q3, we got back into a place where we knew we had appropriate inventory levels and they felt comfortable they were getting appropriate inventory levels for the products. So I think we’re in good shape. So we don’t have any of that anticipated to happen in Q4. And then I think that’s why I gave the guidance into Q4 that I don’t expect as strong a growth rate.

Alton Stump – Longbow Research

Okay. That’s all I had. Thank you, Fran.

Lawrence J. Blanford

Thank you, Alton.

Operator

And we do have a few follow-up questions. We’ll go first to Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale – KeyBanc Capital Markets

Thanks for taking the follow-up. Larry, just again another market sizing question. And comments on the brewers very helpful, but I just wanted to -- if you -- people have asked a lot of questions about market size. Obviously you are very sensitive to giving out what you think it exactly is, but just roughly, I mean, what inning of growth do you think we’re in on in terms of coffee and you getting to the potential of your share of that market and where are we in the non-carbonated beverage market?

I mean, my guess is that in the non-carbonated beverage consumption you’re in the very early stages. But if you look at the dollars that you’re projecting in K-Cup sales, it makes things a little bit confusing, because the coffee market is roughly $10 billion market and you’re projecting about $4 billion in sales now.

So it gets really confusing at the dollar level and I’ve tried to look at things from a volume perspective. So just trying to get a feel of where you think we are in terms of the growth opportunity for Green Mountain and if you could break that into coffee versus non-coffee, that would be very help, just trying to get a feel.

Lawrence J. Blanford

Akshay, interesting question. I think maybe you sort of answered it to a degree yourself. I think relative to hot coffee and tea, I think we still feel there is a lot of upside growth. So, we’re in I think still early innings, but obviously as we think about other beverages we’re in the first inning, particularly if we start looking at a broader array of non-carbonated beverages. And as we have…

Interestingly, I think the way we are now talking about our business, to your point, that we increasingly see our business as a single serve beverage business sitting on top of a very innovative and disruptive technology, which is, of course, the Keurig Brewing system. And the way we think about going forward is trying to increase our share of, broadly, non-carbonated beverage consumption in the home or away from home and certainly we have. We’re in the very early innings of some of these new beverages, under Cafe Escapes and Hot Apple Cider, Brewed Over Ice coffee and tea and we certainly alluded to other categories that are under development where we’ve not yet even put products in test market.

So if you sit back and look at the value drivers of the business, I think we still have, again, a long way to go on brewer adoption in home and away from home and then (inaudible) many opportunities to enhance consumer enjoyment of the system and obviously drive portion pack sales with new beverage categories. I guess beyond that I really can’t be any more specific.

Akshay Jagdale – KeyBanc Capital Markets

That’s helpful. So does that mean that dollars being spent are highly incremental? I mean that’s essentially what aim seeing, is the money being spent on K-Cups is incremental to category growth? Is that -- does the research support that?

T.J. Whalen

Akshay, this is T.J. Thanks. Yes, so there are a number of moving dynamics here. So -- one of which is the side of the category and depending on whose data you look at, when you factor in the value of retail spending on coffee from coffee shops, I think some data sources would suggest that the category is significantly larger than the $10 billion that you referenced. Grocery alone, based on IRI, would be north of three and then consider what people pay on a per cup basis. When they receive coffee in this form they’re obviously placing a much higher value on that experience, given the quality, the speed, the convenience and the consistency of the experience versus what they would place as a value of a cup of coffee when they buy it say in bag form to use in a traditional brewer.

And then, as Larry said, layer on top of that the incremental consumption opportunities that are available to us once we earn our space on those consumer counter tops and we are -- if we’re in the early innings in coffee, we’re really just getting suited up for the field in some of these other beverages in my personal opinion. Take, for example, the fact that in Cafe Escapes we’ve only just right now made this product available to all of our away from home customers. We just haven’t had either the production capacity or the raw material availability to even get into making some of these products available to our customers, let alone seeing how they perform fully in the marketplace.

Akshay Jagdale – KeyBanc Capital Markets

Perfect. One quick one for Fran. What shares outstanding and interest expense are you assuming for fiscal ‘12?

Frances G. Rathke

About -- Akshay, this is Fran. I would say around 160 million, 161 million shares for fiscal ‘12 and in terms of interest, I think we -- approximately 30 million to 35 million.

Akshay Jagdale – KeyBanc Capital Markets

Perfect. Thank you very much.

Frances G. Rathke

Okay.

Akshay Jagdale – KeyBanc Capital Markets

I’ll pass it on.

Lawrence J. Blanford

Thank you, Akshay.

Operator

We’ll go next to Mitch Pinheiro with Janney Capital Markets.

Mitchell Pinheiro – Janney Montgomery Scott

Just two quick questions. What are your marketing plans, expense plans, for the fourth quarter and for fiscal 2012?

Lawrence J. Blanford

Yes, higher. But let me turn it over -- I’ll let --

Frances G. Rathke

We haven’t provided.

Lawrence J. Blanford

No, we haven’t actually spoken to it. I think John can talk in broad terms. John?

John Whoriskey

Yes, Mitch, I would just speak to -- I think you know what we had done in this past holiday season and the expectation would be that. But I think it will be more than that when you consider what some of our licensed partners will be spending now that Dunkin’ Donuts will be in the system in their stores, you know, we have Folgers and Starbucks and I think in addition to our licensed brewer brands.

So I think the combination of marketing investment across the whole system will be much higher than whether it was a year ago and that certainly be driving more reduction for the holiday season and that’s really what we’re preparing our retailers for.

Mitchell Pinheiro – Janney Montgomery Scott

So you think it’s, as a percentage of sales, it would be the same or lower in fiscal 2012?

T.J. Whalen

Mitch, this is T.J. I think we’ve done a good job of demonstrating SG&A leverage as we’ve increased scale here. We haven’t necessarily pulled that from marketing and we continue to invest in marketing, R&D and other drivers of future growth. So I’m not sure that we’ve been explicit in terms of marketing spend levels but what I would say is in my estimate and observation we’ll continue to aggressively invest in growth drivers, that includes marketing spending and I think you see some of the results of that work delivered here in Q3 with this Brew Over Ice effort. And so as John said, we would expect to continue to aggressively scale that as it continues to demonstrate its ability to deliver growth.

Mitchell Pinheiro – Janney Montgomery Scott

Okay. That’s helpful. And then just last, maybe Larry, what percentage of your K-Cups are not the hot coffee and tea? So Brewed Over Ice plus your Naturals and Escapes and things likes that?

T.J. Whalen

Mitch, this is T.J. So that does continue to move around a little bit, depending on the season and what we’re promoting at the time as well as timing of introductions of these items. I think kind of broadly speaking today you might characterize that as roughly 15% of the business as being non-hot-coffee. And as the pie scales, we would expect that 15% slice to scale faster than the overall rate of growth of the system as we continue to aggressively invest in delivering consumer experiences that help consumers find new utility in the brewers that we’re putting on the countertop.

Mitchell Pinheiro – Janney Montgomery Scott

And where do you think that was last year? Non-hot-coffee.

T.J. Whalen

I don’t have that with me at my fingertips, Mitch, but I would say it’s something less than what it is today.

Mitchell Pinheiro – Janney Montgomery Scott

Okay. All right. Thank you very much. Appreciate it.

Lawrence J. Blanford

Thank you, Mitch.

Operator

We’ll take our last question from Bryan Spillane with Bank of America.

Bryan Spillane – Bank of America/Merrill Lynch

Hi. Thanks for taking the follow-up. Just a couple ones, I guess, for Fran. First, depreciation and amortization for 2012? Any guidance on that?

Frances G. Rathke

We’re not -- I don’t think we’re giving that out per se.

Bryan Spillane – Bank of America/Merrill Lynch

Anything unusual about how the CapEx I guess will be depreciated? I’m just trying to figure -- it’s just going to be -- it should move significantly given the CapEx, so I was just trying to get a feel of how to model it.

Frances G. Rathke

I think Bryan in terms of -- as we close out fiscal ‘11, I think heading into ‘12, a lot is when do these -- as we mentioned, we’re very close to a new site for manufacturing, so then that’s just getting a site going. I think when we turn on the equipment and all that is going to happen, that would be probably in the mid part of the year. And then we’re looking at another site as well, as we mentioned and that’s probably more later in the year.

Bryan Spillane – Bank of America/Merrill Lynch

Okay.

Frances G. Rathke

So I think a lot of the depre is going to be more about FY ‘11’s CapEx layering in the increment and then we mentioned as more P&L hits for startup costs. And then amortization, I think, is pretty much what we have today for this quarter. Not major changes there.

Bryan Spillane – Bank of America/Merrill Lynch

Okay. And then -- and then in terms of how some of the -- I’m trying to get an idea of just how the flow will be for earnings in fiscal ‘12 and I know it’s early, but the lumpiness in like the startup costs, a lot of that will hit you later in the year? Is that -- we’re trying to -- I will have to make my own assumption for how I think your revenues will flow and kind of the ongoing business, but I’m just trying if figure out where to put like the $55 million of kind of startup-related type costs. Is that more second half type weighting or…

Frances G. Rathke

I don’t think it’s all -- I would start layering it in, especially starting in Q2. I mean what we’re finding is we like to have hiring and training and onboarding employees -- especially starting up a new plant we’re already looking at really getting the management team hired, ready to go. So -- and then start getting staff ready, so I think that takes a quarter, if you will.

Bryan Spillane – Bank of America/Merrill Lynch

Okay. And then just in terms of kind of where you stand today with capacity and capacity utilizations, how far forward are customers ordering from -- for -- having to order now? Is it order cycle two months? Like your orders in hand today, as you’re kind of looking at the quarter, like just how far forward is it?

John Whoriskey

Bryan, this is John Whoriskey. Maybe I will speak to some of our typical large customer that we do business with. We are planning very far out with them in terms of joint business plans and projections, but their ordering is routine every week through their electronic data interchange and so on. So the key is really planning the business of what’s expected out there so that we’re planning our capacity and availability well in advance of when they actually write the order. So we’re really – honestly, I think we’re beyond six months of planning with a lot of our key customers today.

Bryan Spillane – Bank of America/Merrill Lynch

Do you feel like you have the capacity that you need for the orders that they’re expecting to place over the next six months? I’m just trying to get a sense for -- there’s a lot of the marketing at the holidays. Are you going to be able to actually deliver on all the demand that could be there?

Lawrence J. Blanford

Yeah, Bryan, this is Larry. Right now, as we said, with the catch-up that -- a little bit of the catch-up in Q3, I think our customers are appropriate inventories, we’re appropriate inventories and we’re working to make sure we’re well positioned going into the holidays. As I indicated earlier, in referencing the planning -- the detailed planning we do with our major customers, as John was referencing, we have their numbers, we are committed to trying to deliver those forecast numbers, but it will be -- Q1 and Q2 will be tight. We don’t have a lot of room for any upside.

So we’re working very carefully with all of our customers, we have good communications, we have plans as to rolling in inventories appropriately to get them ready for the holidays in front of our television advertising that will kick-in in the U.S. and Canada. But we will be tight Q1, Q2 as we continue to add capacity pretty aggressively now and into -- well through fiscal 2012.

Bryan Spillane – Bank of America/Merrill Lynch

Okay. That’s very help. Thank you.

Lawrence J. Blanford

Okay. Great. Is that it?

Operator

Sir, we have no further questions. I would now like to turn the call back over to our speakers for any close remarks.

Lawrence J. Blanford

Well, great. I would like to thank all of you for joining us today on the call and again we were thrilled we were able to announce great results for the quarter. We do appreciate your continued support of our company. Thank you.

Operator

That concludes today’s conference. We thank everyone for their participation.